Going self-employed offers a wealth of freedom and flexibility in how you work. You’re your own boss, able to run things your way. But working for yourself comes with added responsibility, particularly when it comes to taxes.
Whether you’re just starting out or you’ve been established for several years, understanding your tax obligations and managing them effectively is crucial to remain compliant and build a tax-saving strategy. Here are some essential tax tips to help you stay on top of your finances.
1. Register with HMRC
The first step for any freelancer, sole trader, or self-employed individual is registering for tax with HMRC. This is a legal requirement, and failing to do so can lead to fines.
You must register if your income exceeds the £1,000 trading allowance or if you want to make voluntary Class 2 National Insurance (NI) payments to help you qualify for benefits and state pension.
Sole traders must register online with HMRC to pay income tax and NI contributions. You’ll receive a Unique Taxpayer Reference number, which you’ll need when filing your self-assessment tax return – so make sure to take note of it.
If you want to set up a limited company, you’ll have to register with Companies House. You’ll be set up for corporation tax at the same time.
2. Understand your allowable expenses
Businesses and freelancers can deduct certain expenses from their income to reduce their taxable profit, resulting in a smaller tax bill. To qualify for tax relief, these expenses must be “wholly and exclusively” for business purposes and include everyday business costs like:
- Office supplies and equipment: Computers, software, printers, stationery, and office furniture.
- Travel expenses: Mileage, public transport fares, and parking fees for business trips. Commutes to regular places of work do not count.
- Home office: If you work from home, you can claim a proportion of household bills (e.g., electricity, heating, and internet) as business expenses.
- Professional fees: Accountancy fees, legal costs, and subscriptions to trade bodies.
3. Keep accurate records
Good record-keeping is essential. It helps you stay organised, accurately manage your cashflow and avoid costly mistakes when filing your tax return. Plus, you’ll be able to ensure you’re claiming every allowable expense you can – and prove your claims if HMRC questions you.
Good record-keeping involves collecting and organising all your financial records so you can easily access and understand them. That will help you complete your self-assessment tax far more efficiently, as you won’t have to search through a mess of documents to work out your income or allowable expenses.
Cloud accounting software like QuickBooks or Xero can significantly simplify this process. These tools allow you to upload and categorise finances far more efficiently, track expenses in real-time and generate reports, making your tax filing much more straightforward.
4. Budget for your tax payments
Sole traders and freelancers are required to pay their tax liability – it will not be deducted automatically from your bank account. Therefore, you should do what you can to work out your predicted tax liability to begin saving for your payment as soon as possible.
Again, cloud accounting software can be invaluable here, as it can use your data to generate tax predictions for you, simplifying this process hugely.
Your tax payments (including Class 4 National Insurance) are known as ‘payments on account’. They help spread the cost of your tax bill over two instalments, each being half of the tax you owe. These payments are due by midnight on 31 January and 31 July.
5. Seeking professional advice
While it’s possible to manage your taxes yourself, seeking advice from a qualified accountant or tax advisor is an incredibly good move. They’ll be able to help you navigate complex tax rules, ensure you’re claiming all the deductions you’re entitled to, and assist with filing your self-assessment.
Above all, they give you peace of mind knowing that your tax work is being completed accurately and on time – saving you from potential fines and penalties. Of all the actions you can do to help yourself, getting the help of a professional is right up there.
Looking for help with your taxes? Get in touch with us and see how we can help with our tax tips for freelancers.
